Viewpoint: Macron’s reform paves way for development of French second- and third-pillar pension

French president Emmanuel Macron fought hard against opposition parties, labour unions, and around 60% of the public, according to some polls, to impose his reform of the pay-as-you-go first pillar of the French retirement system. Amid sometimes violent protests in French streets, the reform was approved by a narrow majority of members of the French assembly in April this year.

The reform, which comes into effect in September, will progressively raise the statutory retirement age from 62 to 64 with a requirement that the retiree has worked at least 43 years.

The minimum pension benefit will be raised to 85% of the French minimum wage. This means that retirees who have worked for 43 years will get a minimum of €1,200 per month at current levels.

The reform also closed most of the system’s ‘special regimes’ to new entrants from September 2023. These are pension schemes for employees of state-owned companies in sectors such as electricity, gas, transport and of the central bank, as well as schemes for professionals such as notary clerks.

The rationale of the reform is simple. The rising life expectancies combined with decreasing birth-rate have accelerated the aging of the French population.

In 2000, the ratio workers to retirees was 2.1 but by 2020 it had fallen to 1.7. In 2070, the same ratio is expected to drop to 1.2, according to official projections made by the French Pension Advisory council (Conseil d’Orientation des Retraites, or COR). This will put the French retirement system in a more and more precarious state.

The PACTE law, approved towards the end of 2019, has paved the way for the growth of second- and third-pillar pension vehicles – Plan d’épargne retraite, or PERs, in their collective and individual versions (PERCO and PERI). But despite this, first-pillar pensions represent on average more than 90% of total retirement income.

For the time being, France has one of the lowest rates of pensioners at risk of poverty in Europe, and a net pension replacement rate of 74%, higher than the OECD and EU averages. French citizens are worried that their pensions would decrease in the coming years, especially in the context of the high rates of inflation.

However, in 2020, France’s expenditure on pension as a share of GDP reached 15.9% compared with 13.6% for the whole European Union. Pensions represented 40.8% of the total social benefits paid in 2020 in France. In the 2023 French state budget, pensions represent 8.2%, nearly at the same level as defence (7.9%) but twice as much as research and higher education, which accounts for 4%.

Meanwhile, international ratings agencies have been putting pressure on the French state to reduce its budget deficit and public debt – 112.5% of GDP as of the end of March this year – to avoid a potential downgrading.

Depending on productivity growth, based on projections by COR, pension spending should increase over the next decade by 0.5% to 1% of GDP, and pension deficits should persist for the next decades, reaching between 0.6% and 1.3% of GDP in 2050.

While it is understandable why people are reluctant to change in the current pension system, without reform the deficits would have resulted into a mounting pile of public debt.

Nevertheless, until Macron’s success in reforming French pensions, the focus of policymakers was on finding resources in the short-term in order to plug the deficit, rather than on having a broader, but more politically sensitive, debate on intergenerational solidarity and on boosting the second and third pillar.

Fortunately, three years after the launch of the PER at the end of 2019, the deployment of these vehicles is a success. As of the end of last year, more than 7 million people are already benefiting from these new PER. That is more than double the objective of 3 million initially set for the end of 2022.

The savings accumulated by PERs are greater than €80bn, largely exceeding the initial objective of €50bn for the end of 2022. This dynamic concerns both corporate and collective PERs (more than €19bn of assets) and mandatory (more than €12bn of assets), as well as individual PERs (more than €49bn of outstanding and more than 3 million beneficiaries).

Christian Lemaire is CEO of New Strategy & Vision, a member of the Occupational Pensions Stakeholder Group (OPSG) of European Insurance and Occupational Pensions Authority (EIOPA) and former global head of retirement solutions at Amundi